Student
Credit Cards for both college and high school students are essential financial tools for building a foundation for long term financial growth. Students should responsibly use credit cards at an early age to establish a positive credit history and credit score. A credit score is an assessment of one’s ability to repay debt and takes into consideration the overall history of that ability.In almost all cases student credit cards are available for individuals whom are at least 18 years of age and most credit card companies have cards specifically designed for students with limited or zero income. Like all credit cards, these will come with a maximum balance in which you cannot exceed (or cannot exceed with out penalty). For new card applicants this balance will range from $500 up to $2,000. If you have been contemplating opening a credit card to fund you college degree, I would reconsider as you may incur a higher interest rate than you would for other financial aid programs geared towards students.
The credit card accountability, responsibility and disclosure ACT is a bill passed in congress that “ensures adequate safeguards for young people.” It “requires issuers soliciting to persons under the age of 21 to obtain an application that contains: the signature of a parent, guardian, or other individual who will take responsibility for the debt; proof that the applicant has an independent means of repaying any credit extended; or proof that the applicant has completed a certified financial literacy course.”
How to build credit responsibly from a student’s perspective:
A student credit card should be used for essential items such as books, food, gas, etc. You should ALWAYS keep track of your monthly balances and pay each balance in it’s entirety every month. If you do not or are not able to pay off your monthly credit card debt you will incur an interest rate on this remaining balance. Typically student credit cards come with slightly lower interest rates as they are geared towards young and inexperienced debters. As with any card, it is essential to be fully aware of what you interest rate charges will be on any unpaid balance. This can range anywhere from 12% – 25%.
Hypothetical scenario 1 (Responsible use of a student credit card):
Johnny Freshman – Johnny is a newly enrolled freshman at Big Stat U and just applied for and received his first credit card with a maximum balance of $1,000. He has mapped out a monthly expense sheet in which he predicts he will incur $715/mo in necessary expenses. He has a part time job at his school’s library that pays him $8.00/hr. He works this job every Monday – Thursday for a total of 25 hours per week. His monthly income is $800. (25 hours/week x 4 weeks in a month = $800/month)
Johnny Freshman puts his routine expenses on his new student credit card.
Itemized expenses for Johnny Freshman -
Food – $100/ week
Gas – $20/week
Books – $55/month
Miscellaneous – $45/week
Total = $715/month
Johnny Freshman incurs a monthly debt of $715 and pays this off in it’s entirety every month from the $800 he takes home from his job at the library. In this scenario Johnny Freshman is building a solid foundation of credit while paying no additional expenses or interest rates on his student credit card.
Hypothetical Scenario 2 (Irresponsible use of a student credit card):
Freddy Sophomore – Freddy is a 2nd year student who loves to have fun, and in college fun always costs money. He doesn’t have any part time job because that gets in the way of fun. He figures a decent way to finance his fun is to open a student credit card. He applies and is excepted for a student credit card with a maximum balance of $2,000.
Freddy Sophomore puts his routine expenses and his “fun expenses” on his credit card.
Itemized expenses for Freddy Sophomore -
Food – $150/week
Gas – $50/week
Books – $0/month
Beer – $50/week
Trips to Vegas – $400/month
Total = $1,400 month
Freddy Sophomore only has his student credit card open for one and a half months before his $2,000 credit limit is all used up. He then realizes that he had agreed to pay 20% APR on his unpaid debt with his particular student credit card. Now Freddy is left with paying a monthly interest payment of $33.00 (2,000 x 20% = $400; $400/12 months = $33.00 per month) for his 1.5 months of fun. Keep in mind he also needs to pay his $2,000 principal as well.
The lesson from these two hypothetical scenarios is that student credit cards can be a double edged sword. They can be highly beneficial or they can be detrimental to your overall and long term financial well-being. Always strive to be like Johnny Freshman so that you can build credit responsibly and reduce future headaches.
